Testing the scale effect predicted by the Fujita-Krugman urbanization model [An article from: Journal of Economic Behavior and Organization]

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Description:
This paper tests the scale effect predicted by the Fujita-Krugman [Fujita, M., Krugman, P., 1995. When is the economy monocentric? von Thunen and Chamberlin unified. Regional Science & Urban Economics 25, 505-528] urbanization model, which implies a monotonically positive relationship between the average firm size and the degree of urbanization, given that population and fixed cost do not decrease. Empirical data from seven OECD countries are examined, and the Fujita-Krugman model is tested. The results suggest that the prediction in the Fujita-Krugman model is incompatible with empirical observation. The evidence in the paper seems to support the alternative classical urbanization theory proposed by Xenophon [Gordon, B., 1975. Economic Analysis Before Adam Smith. Macmillan, London] and William Petty [Petty, W., 1683. Another essay on political arithmetics. In: Hull, C.H. (Ed.), Economic Writings of Sir William Petty. Augustus, M-kelly, New York, p. 947 (Reissued in 1963)] and formalized by Yang [Yang, X., 1991. Development, structure change, and urbanization. Journal of Development Economics 34, 199-222], Yang and Rice [Yang, X., Rice, R., 1994. An equilibrium model endogenizing the emergence of a dual structure between the urban and rural sectors. Journal of Urban Economics 25, 346-368], and Sun and Yang [Sun, G., Yang, X., 2002. Agglomeration economies, division of labor and the urban land-rent escalation: a general equilibrium analysis of urbanization. Australian Economic Papers 41, 164-183].